In his classic 1992 book about the Ronald Reagan 1980s (and so much more), The Seven Fat Years, Robert Bartley described the great Arthur Laffer describing the universality of credit. It goes like this:
“Laffer would draw a tiny black box in the corner of a sheet of paper. ‘This is M-1,’ currency and checking deposits. A bigger box was M-2, including savings deposits. Still bigger ones included money-market funds, then various credit lines. Finally, the whole page was filled with a box called ‘unutilized trade credit’ – that is, whatever you can charge on the credit cards in your pocket. Do you really think, he asked, this little box controls all of the others? The money supply, he insisted, was ‘demand determined.’”
Bartley’s description of Laffer properly explaining money discredits just about all monetary belief in modern times. Lucky enough to have met Dr. Laffer a few times over the years, I’ve always told him I learned more from his writings on monetary policy than tax. And his tax writings taught me an enormous amount.
Thinking about the utterances of Laffer about money during the legendary gatherings at Michael 1, he quite simply nailed it. Laffer showed what’s true, that money is a consequence of production. It’s “demand determined” precisely because it’s production determined. It’s a reminder for the monetary mystics of today (including many self-proclaimed supply siders) that there’s no such thing as “tight” money, not to mention that the Fed’s monetary machinations could in no way result in “tight credit” without the assent of the actual marketplace. The Fed is a follower, which is a line I’m near certain I lifted from Laffer himself.
Credit is borderless. If you’re productive, the money exchangeable for resources will find you. Always. The Fed could announce next Tuesday that it was exiting the money game altogether, and there would be replacements for the dollar on Wednesday; if not sooner. We seek “money” for what it can be exchanged for, which means that as long as there’s production, there will always be exchange mediums moving production’s surplus to its highest use.
All of this and much more came to mind while reading supply-side historian nonpareil Brian Domitrovic’s thoroughly excellent new book, The Emergence of Arthur Laffer: The Foundations of Supply-Side Economics in Chicago and Washington, 1966-1976. The “Laffer of the time before he met Reagan is the subject of this book.” After which, monetary policy is the primary subject. Though Laffer is most known for tax policy today, currency policy was his main focus in the early years. Domitrovic notes that Laffer’s early work “at most tangentially referred to taxation.”
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